OMAHA, Neb. — The stage is set for Berkshire Hathaway's annual shareholders meeting on Saturday and investors are ready to grill the conglomerate's two front men, Warren Buffett and Charlie Munger, on five key issues.
First, Berkshire Hathaway continues to underperform relative to the broader market and investors want to know what the Oracle of Omaha plans to do to rectify this.
Second, Berkshire is sitting on a massive pile of cash that totals more than $100 billion. Shareholders want to know whether Buffett sees any deals out there or will he buy back more Berkshire stock.
There is also the Kraft Heinz issue. Berkshire took a massive hit on its Kraft Heinz investment last year after the consumer goods maker slashed the value of two of its most popular brands. Shareholders and analysts want to know where does Berkshire go from here on this experiment.
At the same time, shareholders are digesting news of Berkshire's involvement in a bidding war between two energy companies.
Lastly, succession continues to be an issue for shareholders. Buffett has hinted at two possible replacements, but given his age, shareholders want to hear more on the matter.
This guide breaks down these five issues to help better navigate the hoopla surrounding this year's "Woodstock for Capitalists."
Berkshire has obliterated the since under Buffett's leadership. Berkshire Hathaway shares are up more than 1,000,000% on a book-value basis since 1964, according to the Buffett's latest annual letter to shareholders. In that time, the S&P 500 is only up around 15,000%, including dividends.
But that has not been the case recently. Berkshire's total returns are trailing the S&P 500's over the past one, five, 10 and 15 years. For example, $1,000 invested in Berkshire in 2009 would be worth more than $3,500 now. Meanwhile, that same amount invested in the S&P 500 would be worth more than $4,000.
Over those time periods, shares of tech companies like Microsoft, Apple and Amazon have surged, lifting the S&P 500. Buffett, meanwhile, largely avoided companies like these until recent years. In 2016, Berkshire started buying Apple, which is now its largest holding. CNBC also reported Thursday that one of Berkshire's investment managers under Buffett started buying Amazon shares.
"The stock has definitely underperformed and people will definitely want to get a handle on why that's happening," said Meyer Shields, an analyst at Keefe, Bruyette & Woods. "Not sure you'll get a great answer on that because Warren Buffett and Charlie Munger have said it before: short-term stuff tends to bounce around."
"Nonetheless, the question is on people's minds."
Shareholders want to know what will Buffett do with the company's $112 billion cash stash.
He said in his annual letter in February that he wants to make an "elephant-sized" purchase with the $112 billion in cash that Berkshire was sitting on, but said he could not because "prices are sky-high."
Buffett does not invest in companies he thinks are overvalued. He prefers to invest in companies when they are undervalued and make money as the market realizes their actual value.
But Buffett has hinted that money could be spent another way: through buybacks. Berkshire bought back $1.3 billion in shares last year, but Buffett said in the letter that it was "likely" that Berkshire will buy back more stock in the future. The Financial Times also reported that Buffett said, without providing any time frame, that the conglomerate could repurchase $100 billion in shares.
"I'm not opposed to them buying a lot more Berkshire," said Trip Miller, managing partner at Gullane Capital Partners, which also owns Berkshire stock. "If they're going to hold cash and make next to nothing on it, I believe it's a much smarter decision just to buy back shares of Berkshire. I think he should be sitting on $50 billion in cash right now. I don't think he's going to find anything for $50 billion or greater to buy."
Buffett told shareholders in his annual letter that Berkshire took a $3 billion hit in the fourth quarter of 2018 after Kraft Heinz cut the value of its Oscar Mayer and Kraft brands by $15.4 billion. Now, investors and analysts want to know what will be Buffett's next move on that front will be.
Berkshire partnered with 3G Capital, a private equity firm from Brazil, to acquire Heinz in 2013. Two year later, Berkshire helped finance Kraft's $49 billion merger with Heinz. The stock has lost more than half of its value since the merger.
Buffett told CNBC's Becky Quick on Feb. 25 that Berkshire Hathaway "overpaid" for Kraft, but not for Heinz.
"Kraft Heinz's recent troubles have raised concern about whether Berkshire's partnership with 3G Capital has become a weakness for Berkshire," Barclays analyst Jay Gelb wrote in a note earlier this week. "We doubt Berkshire would reduce its investment in Kraft Heinz, but we also think Berkshire could be less likely to partner again in a major deal with 3G."
Buffett may not have found his "elephant-sized" purchase yet, but he sees opportunity in a bidding war within the energy space.
On Tuesday, Berkshire announced it had committed $10 billion to a preferred stock investment in Occidental Petroleum which was contingent on the energy company acquiring Anadarko Petroleum. The investment places Berkshire in the middle of a bidding war between Occidental and Chevron, which had offered $33 billion in cash and stock for Anadarko.
While it is rare for Berkshire to get involved in a bidding war like this, CFRA Research analyst Catherine Seifert thinks this move makes perfect sense for Buffett. However, there are some risks involved for Berkshire.
"The structure of this deal is a classic Berkshire financing transaction … although the terms of this deal are not as attractive as some of Berkshire's previous transactions," Seifert said in a note. "We also think there is reputation risk to Berkshire in this transaction, since the deal is contingent upon OXY consummating its takeover of APC versus rival bidder Chevron (CVX) and this transaction falls short of an outright acquisition by BRK, something the market is craving."
The one question that Berkshire Hathaway investors have been asking is who will lead the company after Buffett leaves.
Buffett is 88 years old and most of the company is now run by longtime Berkshire executives Greg Abel and Ajit Jain. Abel, 56, now leads Berkshire's noninsurance businesses while Jain, 67, is in charge of all insurance-related businesses.
Abel and Jain are the two favorites to take the reins from Buffett, but he has not indicated when — or if — he plans to leave.
"To some extent, I think it complicates things," said Shields of Keefe, Bruyette & Woods. "If someone is the designated successor and their not in charge for another two years or five years, that can be a little strange. Again, things are a bit different within the Berkshire empire than elsewhere, but I think that's the main issue."
— CNBC's Tom Franck and Michael Bloom contributed to this report.